With Hong Kong already trading offshore yuan, and London hoping
to take over that mantle in the coming years, China may just have
taken another step toward making its currency convertible.

The China Development Bank initiative

China now plans to offer
renminbi loans to other BRICS nations Brazil, Russia, India
and South Africa, the Financial Times reported. The China
Development Bank (CDBs) will reportedly sign a memorandum of
understanding (MoU) in New Delhi with its BRICS counterparts on
March 29. The five dominant emerging economies are signing the
initiative in an effort to boost trade and promote the use of the
renminbi for international trade over the dollar.

China first made the yuan convertible for trade settlement back
in 1996. As of now 13 percent of China's trade in Asia is
conducted in renminbi, but the renminbi's share of regional trade
is slated to rise to 50 percent by 2015, according to HSBC. The renminbi's greater role in financing
trade could also be a huge advantage for China since it forces
other countries to take on the risk of adverse currency moves.

The internationalization of the yuan

Earlier this year Deutsche Bank analyst Alan Cloete said the
renminbi is expected to become a
major reserve currency in the next decade. He expects the
U.S. dollar's share of the global reserve currency basked to fall
from about 60 percent now, to 50 percent by 2020.

And signs of this are already apparent. First, many countries
have been diversifying their foreign reserves to include the
renminbi because they expect the currency to strengthen and
eventually become a reserve currency. 0.3 percent of Chile's
foreign reserves are held in renminbi. In September last year,
major oil player Nigeria said it would diversify five to 10
percent of its foreign exchange reserves to include the yuan.

Second, China has expressed its interest in adding the renminbi
to the IMF's Special Drawing Rights (SDR) currency basket, as a
reserve currency. CDBs initiative if it goes through will only
speed up the process.

At The Rise of the Renminbi conference, Hongbin
Qu, HSBC's managing director said:

"The pace of the renminbi internationalization has been much
faster than almost everybody expected in the last few years.
We're expecting this trend to continue. In the next two to three
years we expect the renminbi to become one of the top three
global currencies being used in global trade."

For the renminbi to become fully convertible however, it would
have to appreciate to fair market value and the government would
have to cede some control of its financial markets. But it's
unclear how likely this is. After all,
PBOC governor Zhou recently said that currency convertibility
doesn't mean surrendering control of cross-border financial
transactions